NEW DELHI. PM Jagtap Member of ITAT vide a landmark ruling ITAT-2007-136-ITATon tax liability of Non-Resident Companies providing services to Indian Companies has ruled that the amounts received for services in question is not liable to tax in India.

The amounts had been received by the Non-Resident Company mainly for the following services and facilities provided to the Indian clients/hotels in connection with publicity and marketing:-

*Sheraton brand advertising – this advertisement is made by the assessee on various media such as TV, newspapers, magazines, posters etc.

*Presentation at Trade shows – The assessee sets up display and information booths at all major shows/exhibitions of hotel trade in the world such as ITB-Berlin, WTM-London, Arabian Travel Mart-Dubai, BIT-Milan, etc. where all Sheraton affiliated hotels of the world or of a particular region have their stalls.

*Participation in Sheraton Roan shows to travel agents – The assessee organizes meetings in important cities of the world where persons engaged in the travel trade and key account customers are invited and presentations are made to them about all Sheraton affiliated hotels.

*Worldwide directory and regional directories – The assessee prints at its own cost directory of all its client hotels and also directories of its client hotels located in a particular region (India is listed in the Asia Pacific region). The worldwide directory and directory of the particular region is placed in all the hotel rooms so that a guest staying in any hotel gets information about Sheraton affiliate hotels in the particular region as well as anywhere in the world. Such directories are also placed in the general sales offices and central reservation offices.

*Divisional Brochures – The assessee publishes brochures called ‘a la carte’ and ‘at a glance’ containing information about its client hotels which are sent to travel agents, wholesalers, incentive planners, convention planners etc.

*In room magazine- The assessee publishes, inter alia, an in-room magazine called ‘Sojourn’ which contains information about all its client hotels in a region and also carries features about the country, state or city where such hotels are located in order to enhance awareness and create interest in the minds of the guests of its client hotels about the places and the hotels. This magazine is placed in the hotel rooms.

*The directories, divisional brochures, magazines etc, are printed at the assessee’s cost and the client hotels only pay for the cost of freight and import duties, if any, for receiving the same.

*Participation in sister hotel promotions – The assessee’s client hotels are entitled to participation in such promotional programmes where certain hotels are selected as ‘hotels of the month’ and the tent, cards, posters and other merchandising material are kept on display at all client hotels of a region for a month. This is done especially for the new hotels to create awareness among potential customers.

The main purpose/intention of the association between the assessee and the Indian clients/hotels was to promote the hotel business in their mutual interest through worldwide publicity, marketing and advertising and the various facilities as well as services were merely the means to attain this main objective. The same, therefore, were ancillary and auxiliary services to the main job undertaken by the assessee company of promoting the hotel business by worldwide publicity, marketing and advertisement.

various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest cannot be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of ‘royalties’ or ‘fees for included services’. Such an approach adopted by the Revenue authorities, in our opinion, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced from the main intention within the meaning of ‘royalties’ or ‘technical services’ as defined in Explanation – 2 to Section 9(1)(vi) or to Section 9(1)(vii) and/or that of “royalties” or “fees for included services” as defined in Article 12(3) and 12(4) of the DTAA between India and USA was neither well-founded nor justified.

a close reading of the relevant agreements especially the payment clause, the predominant nature of the services rendered, the integrated arrangement between assessee company and Indian hotels/clients as well as the nature of relationship between them as reflected in the relevant agreements so also as understood by both the sides leaves no doubt that the entire consideration was paid by the Indian hotels/clients to the assessee company for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwide and this being so as well as considering all the facts of the case including especially the fact that other services to be rendered by the assessee as enumerated in the various Articles of the relevant agreements were merely ancillary or auxiliary in nature being incidental to the integral job undertaken by the assessee to provide the services in relation to advertisement, publicity and sales promotion of the hotel business worldwide, it is very difficult to accept the stand of the Revenue that the amount so paid for the use of a patent, invention, model, design, secret formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as envisaged in Article 12(3)(a), 12(4)(a) or 12(4)(b) of the DTAA or in Section 9(1)(vii) read with Explanation 2.

all payments made to the assessee by the Indian hotels/clients were subject to deduction of tax at source and although no tax was actually deducted at source, the assessee could not be held to have committed default in paying the advance tax. Consequently, there could be no liability to pay interest u/s 234B.

the payment of contributions, in respect of the said programme was not made by the Indian hotels/clients to the assessee company in pursuance of the agreements entered into between them and whole of the amount received as contribution under these programmes was to be given back to the members in the form of various rewards through SCI Points as per the scheme itself as is evident from the relevant, programme guide. The amount received by the assessee company from the Indian hotels/clients in respect of the said programmes could not be treated as 'royalty' or 'fees for technical or included services' either under the, relevant provisions of the income-tax Act or even under DTAA.